Finance & Economics

China Consumers Face Growing Utility Costs

In China, the local consumer community has recently been facing very unfavorable circumstances in the economic environment of this Asian country in the form of a prolonged and deep downturn in the real estate market and a weak labor market, but this negative period still shows no signs of an early end and at the same time is being scaled by the emergence of a new challenge, which has become a sharp increase in the cost of utilities.

China Consumers Face Growth Utility Costs

In April, the brokerage company Haitong International Securities Group released information that since June 2023, at least 125 Chinese cities and counties have reported a growth in gas prices by about 10%. This is a sensitive change in the indicator for citizens of an Asian country, whose personal budgets have recently been under increased pressure against the background of an unfavorable period, which is the current reality for the local economic system. It is worth noting that Beijing has not yet coped with the consequences of the coronavirus pandemic. The recovery of the Asian country’s economic system after a period of difficult sanitary and epidemiological situations, which limited or in some cases paralyzed business processes, is proceeding at a slower pace than preliminary expectations regarding the degree of intensity of this process.

Also, official reports from the Chinese authorities indicate increased water and power prices. These decisions are made throughout the country and do not belong to the category of economic measures, which apply only to certain regions.

It is worth noting that the current increase in utility prices in China fully corresponds to those characteristics that give a reasonable and sufficient reason to call this tendency a factor that worsens the situation, which is already negative. The economic state of affairs in an Asian country is not an example of a positive one. In April, the growth of consumer spending in China decreased to 2.3%. The pace of corresponding activity turned out to be the slowest since 2022, when the so-called epidemic downturn was recorded, associated with the negative impact of the coronavirus on the economy. This information was released last week by the National Bureau of Statistics. The mentioned data also shows that in April there was a sharp drop in consumer demand for cars, clothing, and shoes.

It is worth noting that the increase in utility costs can be a factor of a wide-scale impact. Consumers who are forced to increase the mentioned item of expenditure, which for objective reasons cannot be abandoned or ignored to a certain extent, are highly likely to shrink their level of purchasing activity in some sectors of the goods and services market.

At the same time, the specified economic difficulties are not peak and final. It is known that China State Railway Group in June will increase fares on several popular high-speed routes by 20% in June. The implementation of this decision will be another factor aggravating the already unfavorable economic situation of the consumer community of the Asian country.

Zhaopeng Xing, Senior China Strategist at ANZ Bank China Co. in Shanghai, suggests that new decisions on the upward revision of pricing policy will be a serious hit to sentiment. In this case, the sentiment of the consumer community of an Asian country is implied. In the relevant context, the expert separately noted that Chinese households have already been severely affected by low-income forecasts, which means an increase in the cost of living.

Currently, Asian country municipality officials insist on the point of view that an increase in spending is a necessary measure in the context of those circumstances that form the current configuration of economic reality. Their financial situation has deteriorated significantly amid the crisis in the real estate sector. As a result of the mentioned state of affairs, municipal authorities began to sell much less land, which means shrinking one of the main sources of cash streams. The debt burden on the specified authorities is about $9 trillion. Against this background, financial opportunities are significantly limited.

Liu Boyang, head of the research unit at CNCB Hong Kong Investment Ltd., says that China is currently experiencing a problem in supplementing the fiscal gap.

At the same time, overall inflation in the Asian country is low. The headline consumer price index in China rose by only 0.3% year-on-year last month. Currently, there is a risk that an increase in utility costs may become a kind of factor of disproportionate impact on consumer sentiment. Chinese households have enjoyed cheap tariffs for a long period, which were provided with significant state subsidies.

In some parts of Shanghai, residents have already begun to prepare for the fact that their water supply bill will increase by 50%. In Guangzhou, China’s export powerhouse, the municipal authorities said that a similar decision they had made was due to the need to improve infrastructure and encourage water conservation. At the same time, residents expressed categorical dissatisfaction with these measures, as evidenced by the results of public hearings.

At the same time, the main item in the structure of utility costs is power charges.

It is possible that in the new economic conditions, Chinese residents will be forced to change their approach to certain household activities. In this case, it implies measures aimed at forming the practice of moderate consumption of utilities, which is necessary against the background of an increase in tariffs. For example, in some cases, the shower time may be reduced and control over electricity consumption may be strengthened.

It is obvious that the increase in utility prices will be a factor affecting the overall economic situation in China. The Asian country has been facing the problem of weak consumer demand for several years. With the maximum probability, an increase in utility prices will exacerbate the specified negative state of affairs. The increased economic impact of the mentioned underlying expenditures factor will increase a kind of caution and restraint of consumers when purchasing goods. In conditions of limited budgetary opportunities, people tend to reconsider expenses and give preference only to priority needs, abandoning the practice of making purchases that are not critically necessary to maintain the life process.

At the same time, negative forecasts do not mean that China’s economic system will face what can be called a total disaster or a large-scale collapse. Data from the broker Tianfeng Securities shows that utility costs account for only 5% of the average spending of Chinese households.

At the same time, Beijing is making attempts to stimulate consumer activity and turn the economic situation around. For example, the Chinese authorities have launched a trade-in program for new appliances. There are also subsidies in the Asian country, which at the same time are small.

Last week, the government of the head of the People’s Republic of China, Xi Jinping, announced its most determined attempt to improve the situation in the real estate market. Beijing intends to allocate 300 billion yuan ($41.5 billion) to eliminate excess housing inventory. The Chinese authorities also announced plans to implement measures to ensure developers’ access to financing and encourage the repurchase of so-called idle land. The corresponding action is the most ambitious effort by an Asian country to improve the situation in the real estate sector. The successful implementation of these intentions will become a factor of positive impact on the entire economic system of China.

The so-called re-lending funds will provide local state-owned enterprises with the opportunity to purchase unsold residential homes, which can then be offered to consumers as affordable housing. This was announced by officials at a briefing held on Friday, May 17.

It is possible that the measures to combat the crisis in the real estate sector, which became known last week, are a kind of initial stage of the relevant efforts. In this case, it is implied that Beijing may eventually begin to take more significant actions to overcome the current state of affairs in the real estate market. Against the background of news about the efforts of the Chinese authorities, Hong Kong’s benchmark Hang Seng Index rose 1.6%, reaching its highest level since August.

Citi analysts say that the announced measures to combat the crisis in the real estate market are symbolic and intended to demonstrate support for this sphere of activity.

Speculation about government activities to save the Chinese real estate sector has intensified significantly after a local media outlet published information last month that Beijing was learning about Tokyo’s experience in dealing with the relevant problem. At that time, journalists claimed that China could launch a program to acquire unfinished housing, which would then be transformed into financially affordable real estate for subsequent sale or rent.

Returning to the topic of the condition of the Asian country’s economic system and its prospects, it should be noted that many experts demonstrate a very optimistic attitude in the context of the relevant issue. According to many analysts, China will be able to achieve its economic growth target of 5% in 2024. Peiqian Liu, the Asia economist at Fidelity International, is one of those who is optimistic. According to the expert, China’s economic system will be on an improvement trajectory in the current year. Peiqian Liu suggests that the driving force behind the implementation of a favorable scenario will be growth in the manufacturing sector of the Asian country. The expert also stated significant expectations regarding the impact of consumer activity on the overall economic situation in China. However, after the increase in utility prices, this factor in the implementation of a positive scenario will weaken at best, because in conditions of a limited personal budget, people spend mainly on what they literally cannot do without, and refuse expenses that are not critical to their livelihoods.

Last year, China’s economy grew by 5.2%. It is worth noting that forecasts regarding the prospects of the current year are gradually improving, although these visions of the further state of affairs provide for a deterioration in the dynamic of the mentioned indicator. For example, in January, the IMF said it expected the Chinese economy to grow by 4.6% in 2024. The previous version of the forecast from the experts of this organization provided that the mentioned indicator would increase by 4.2%.

It is worth noting that the difficulties caused by the current configuration of economic reality in China are sensitive not only to ordinary consumers but also to businesses. Currently, local companies are faced with a dilemma as to how to deal with the problem of price pressure. In this case, there are two options for action, among which responding to economic challenges by increasing internal operating costs or a kind of financial survival strategy involving raising the cost of goods and services, which means an increased consumer burden.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.